Pakistan: Public Sector Enterprises Reform Program (Subprogram 2)

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Lessons

Country analysis and ownership are essential to ensuring the design efficacy and implementation success of ADB-assisted programs/projects.

While large shifts in the political and economic context can create significant implementation challenges, strong alignment with country strategies and policies helps ensure the relevance of ADB-assisted programs/projects to the country context. Such relevance provides the foundation for country ownership of the ADB-financed initiatives and develops a strong sense of responsibility for their success among key stakeholders. For example, this program succeeded in achieving its key objectives despite challenges because it was strongly aligned with Pakistan Vision 2025. Careful diagnostics enabled the program to identify and prioritize the policy actions that would lead to the attainment of these objectives.

Project Cycle Stage:

Preparation

Technical assistance, peer consultations, and stakeholder feedback strengthen the design and technical foundation of programs/projects.

This program benefitted from, and involved a range of technical assistance, stakeholder feedback, and knowledge activities and consultations within ADB divisions, incorporating lessons from previous ADB-funded reform programs and addressing issues identified during preparation. These processes established a strong foundation for the program’s reform agenda, which meant that policy actions were both well-founded and viewed as appropriate by the government amid the political and economic challenges.

Project Cycle Stage:

Preparation

Consistent policy dialogue and a focused agenda are crucial to the successful implementation of reforms.

The program successfully supported high-level policy dialogue between the government and ADB on reform actions, which would otherwise have been difficult to achieve. As institutional capacity within the government remained constrained, dialogue focused on restricting the reform agenda to fewer actions with a sharper focus on the most important measures. Consistent dialogue was key to avoiding straying from the program focus. Focusing on the most important reforms optimized program impact.

Project Cycle Stage:

Implementation

Public sector reforms in Pakistan are complex and require a comprehensive, long-term approach and perspective.

The complexity and long process of achieving economic and public sector reforms need to be recognized. One program loan cannot be realistically expected to achieve economic growth, fiscal balance, and efficient and effective use of resources by public enterprises. In preparing this program, care was taken not just to link all the intended results to policy conditions but also to ensure that the policy conditions were realistic, given the country context and existing capacities. Such a process and the resulting program design proved effective in ensuring that the complexity in reforming the public enterprises in Pakistan was carefully addressed and the results build up toward the attainment of long-lasting and wide-ranging public sector reforms in the country.

Project Cycle Stage:

Preparation

The success of reform programs hinges on the operability of their policy conditionalities.

The ability of the program lending modality to bring about structural changes is constrained by the inoperability of its policy conditionalities. To ensure successful implementation, adequate attention must be given to this characteristic of the modality that, under this program, was addressed by focusing on the specific, most important policy conditionalities. For instance, rather than extending to institutional capacities, this program focused on amending the statutes to allow for the corporatization and improve the governance of public sector enterprises. This approach expanded the scope for, and significantly contributed to, program success.

Project Cycle Stage:

Preparation

Reforms take time.

The economic and public sector management reforms initiated under this program led to attitudinal changes toward accountability, but they fell short of reaching a critical mass in many cases. Assumptions about private sector participation needed to be reviewed and updated regularly. Overall, this program experience highlights the oft-cited lesson from past and ongoing reform programs/projects that reforms take time and hence need to be continually supported by ADB.

Project Cycle Stage:

Preparation

Background

Until the first half of this decade, Pakistan's public sector enterprises (PSEs) continued to have generally weak financial health and relied on significant regular fiscal transfers and sovereign credit guarantees to maintain their operations. Underlying reasons include weak management and governance, political influence in PSE management, low labor productivity, quickly deteriorating capital equipment, budget constraints, and tariffs below full cost-recovery levels. Past investments were also insufficient to support competitiveness and quality service delivery.

To help address the challenges, the Asian Development Bank (ADB) approved a policy-based programmatic approach to financing the Public Sector Enterprises Reform Program (PSERP). Building on the reforms initiated under its predecessor subprogram, subprogram 2 (SP2) of the PSERP, the focus of this report, aimed to improve the performance of PSEs through strengthening corporate governance and accountability, identifying and reducing PSE contingent liabilities, and initiating critical reforms. It was approved in June 2017 for a loan of $300 million, and by sequencing and consolidating the reforms earlier achieved, sought to further enable the government to augment the fiscal space for critical development expenditures.

As with the entire PSERP and subprogram 1, SP2 had the reduction of net fiscal transfers from the federal budget to PSEs as anticipated impact and improved PSE performance as outcome. To achieve these results, it implemented policy actions to further deliver on the three outputs sought to be realized through the PSERP: (i) policies to address labor issues, including and based on a cost-benefit analysis, and a communication strategy introduced; (ii) financial transparency, monitoring, and corporate governance of PSEs improved; and (iii) restructuring and reform of selected PSEs initiated.

At completion, SP2 has enhanced all the policy actions initiated under subprogram 1. The Privatization Commission completed more public awareness activities on the costs and benefits of the PSE reforms. Each of the country’s electricity distribution company established a separate trust for its Retirement Cost Fund with an independent board of trustees. The Ministry of Finance (MOF) allocated 15 billion Pakistani rupees (about $123,500 million) in the 2018 annual budget for PSE reforms in the power sector. An information technology plan was approved and subsequently operationalized. The financial performance of all federal PSEs was made transparent through reports published by the MOF and individual PSE websites.

Compliance to corporate governance rules (CGR) was consistently assessed and reported by PSEs to the Securities and Exchange Commission of Pakistan that, in turn, submitted the reports to the MOF. Reform of PSE corporate governance, including ensuring women representation in PSE boards, was further enhanced through new policy issuances and amendments to existing rules and regulations. Restructuring and strategic privatization of selected PSEs were also carried forward, additionally covering the House Building Finance Company, the SME Bank Limited, and the Postal Life Insurance.

Because of SP2 policy actions, the proportion of PSEs submitting CGR compliance statements has risen significantly to more than 60% versus 35% at the start of the program. The performance monitoring mechanisms of PSE boards have improved, and all the PSEs have been brought within the ambit of CGR. Despite delays, the restructuring and privatizing of selected PSEs can be expected to gradually diminish the fiscal deficit-to-gross domestic product ratio and improve the profitability of and dividend incomes from PSEs.

The MOF, through its Finance Division, was the program executing agency. The Finance Division, Ministry of Railways, Pakistan Railways, the Privatization Commission, and the SECP were the implementing agencies.

Project Information

Project Name:

Public Sector Enterprises Reform Program (Subprogram 2)

Report Date:

September, 2019

Main Sector:

Public Sector Management

Country:

Pakistan

Project Number:

48065-003

Report Type: